Enron was an energy-based company in Houston, Texas. It was formed in 1985 as the merger of Houston Natural Gas and Internorth (two gas companies). During this time, Kenneth Lay was the CEO of Houston Natural Gas, which is why he was appointed CEO of Enron in 1986. Enron originally began as a pipeline company until 1999 when it launched its broadband services unit and Enron online. It used its company website for trading commodities which led to become 90% of Enron’s revenue. This company pioneered innovative trading products such as gas futures and weather futures. Enron portrayed rapid growth; in the year 2000 the company reached $100 billion in revenue, earning the title of 7th largest company on Fortune 500 and 6th largest energy company in the world.
Enron had quite a journey to success as it did to its failure. It all began in 1985, when the two gas companies merged to create Enron. In 1989, Enron began trading natural gas commodities, which successfully led to the launch of Enron Online the following year (1990). Instability was evident within the company, especially with its management. In December of 2000, Kenneth Lay stepped down from his CEO position and Jeffery Skilling replaced him; however, on August 14, 2001 Lay took position as CEO again. A day after Lay took his position as CEO again, he received a letter from an employee claiming that accounting irregularities present within the company. Just a little over a week later, Enron stock price hit a record high of $90.56. A few months later, in October of 2001 Anderson Accounting began to destroy Enron’s audit documents. On October 16, 2001 Enron reported losses of $638 million and $1.2 billion reduction in shareholder’s equity. This clearly jeopardizes Enron’s credibility and standing within its market. On November 28, 2001 Dynergy pulls out of taking over Enron; soon after, Enron files for Ch. 11 Bankruptcy.
Of course, with such a scandal there were many people that were affected by the failure of Enron. Enron employed 20,600 people, 62% of which had their 401k assets invested in Enron stock. Enron cancelled all health and medical insurance benefits for the employees that were laid off, which put many employees in a tough position. For example, Mark Lindquist found himself struggling to find an alternative way to pay for therapy for his autistic son after he lost all his health benefits when he was laid off. Many employees weren’t aware of the stock “lockdown” and were also unable to sell their shares, meanwhile the executives made million in selling their stocks. The stock lockdown began the day after Enron’s release of $618 million loss.
The first question that comes to mind after hearing about the Enron Scandal is: How did they get away with it for so long? My group and I were able to draw two conclusions to this question. First, Enron had multiple Special Purpose Entity’s (SPE), which were subsidiary corporations designed to serve as a counterparty for swaps and other credit sensitive derivative instruments. Enron contributed hard assets and related debt to its SPEs in exchange for an interest. The concept of this corporation created accounting loopholes, which enabled these vehicles to become a way for CFOs to hide debt. In order to hide losses and fabricate earnings the CFO of Enron,